Lynch's Estate v. Commissioner of Internal Revenue

• Decision Date: 07 August 1945
• Docket Number: No. 296.,296.
• Citation: Lynch's Estate v. Commissioner of Internal Revenue, 162 A.L.R. 313, 150 F.2d 747 (2nd Cir. 1945)
• Parties: LYNCH'S ESTATE et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

150 F.2d 747 (1945)

LYNCH'S ESTATE et al. v.COMMISSIONER OF INTERNAL REVENUE.

No. 296.

Circuit Court of Appeals, Second Circuit.

August 7, 1945.

Monroe J. Cahn, of White Plains, N. Y., for petitioners.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, A. F. Prescott and S. Dee Hanson, Sp. Assts. to Atty. Gen., for respondent.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The decedent, Humphrey J. Lynch, was a member of the bar and during the year 1931 acted as legal counsel for Marguerite H. Lynch, Elizabeth F. Lynch and Anna L. Lynch in the prosecution of claims for their benefit against the Estate of John H. McArdle, deceased, in the Surrogate's Court of Westchester County, New York.On October 30, 1931, he succeeded in obtaining for them a decree from the Surrogate allowing their claims to the amount of $56,160.In the same decree the Surrogate found the assets of the McArdle Estate at the date of McArdle's death to have been $400,920.10 and the liabilities, including the claims of Marguerite, Elizabeth and Anna Lynch fixed at the aggregate of $56,160 and other claims fixed at $83,620, to have amounted to $139,780.In the decree the Surrogate directed that the various assets of the estate be held subject to the further order of the court.Complete distribution of the estate and payment of the claims of the Lynch sisters did not take place until 1940, or approximately two years after the death of Humphrey Lynch.The delay in distribution and payment was occasioned by conflicting claims of several of the claimants for priority in distribution, by further claims based on assessments of bank stock of the estate and by the fact that the assets of the estate were not in a liquid condition.

The claims of the three Lynch sisters against the McArdle Estate were for moneys advanced to him and for board and living expenses furnished him and his wife, who was their sister, over a number of years.On November 30, 1931Humphrey Lynch appealed on behalf of the Lynch sisters from portions of the decree of October 30, 1931, which had disallowed interest and some other claims which they had made, and on December 1, 1931, certain devisees under the McArdle will appealed from the decree which had allowed the claims of the sisters.Both appeals were later withdrawn.

On November 16, 1931, Freda Rosenblum, an attorney associated with Humphrey Lynch, wrote a letter to the Lynch sisters informing them that an assignment in the amount of $7,000 of the money due them by virtue of the decree against the McArdle Estate would be acceptable to Lynch in payment of his fee of $5,000 for services already rendered and a further $2,000 for work in connection with the appeal which he was then contemplating from the disallowance by the Surrogate of interest and other claims of the sisters.The assignment which was non-interest bearing was executed by the Lynch sisters on November 18, 1931, and recited that in consideration of one dollar and other good and valuable considerations they"have sold, assigned, transferred, and set over, and by these presents do sell, assign, transfer and set over unto Humphrey J. Lynch * * * his executors * * * and assigns, to his or their own proper use and benefit, the sum of $7,000 out of the money due us individually or jointly from the estate of John H. McArdle deceased."

On February 2, 1935, Humphrey Lynch waived in writing his right to payment of a certain dividend of .031141 payable on the original claims allowed by the Surrogate to the Lynch sisters amounting in the aggregate to $1,839.50 "upon the agreement and understanding, however, that any and all further dividends as and when paid shall be paid to Humphrey J. Lynch under the said assignment in satisfaction of whatever sum he is entitled to receive thereunder, * * *."The sisters were thereupon paid that aggregate on account of their claims.

The decedent Humphrey J. Lynch, who died on January 24, 1938 and had reported income on a cash basis, did not include any part of the value of the claims of the Lynch sisters of which a partial assignment to the extent of $7,000 was made to him in 1931 in payment of his fees.The distribution of $5,000 to his estate in 1940 was the first payment made on account of his fees.The remaining $2,000 was apparently never paid because the appeal on behalf of the sisters was not prosecuted beyond the mere filing of the notice of the appeal and was ultimately abandoned.The record does not show when this appeal was abandoned, or when the appeal by the other parties, who were attacking the claims of the sisters, was withdrawn.Therefore, so far as we are informed, the doubtful status of the sisters' claims and of that of the executors of the will of the taxpayer was not changed until after the withdrawal of the appeal which may not, so far as we know, have been during the first twenty-four days of January 1938 — just before his death.

The taxpayer insists that the assigned claims which the testator took in payment should have been valued in 1931 when the assignment was made, but the Commissioner contends that it should be assessed as income for the year 1938, remaining due at the time of the testator's death on January 24, 1938.

Section 42 of the Revenue Act of 1938, 26 U.S.C.A. Int.Rev.Acts, page 1027, reads as follows:

"Sec. 42.Period in which items of gross income included

"The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period.In the case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period."

It is to be noted that Humphrey Lynch was reporting on a cash basis, and we are referred to no other method of accounting permitted him by the Commissioner.His rights after he received the partial assignment depended upon the Surrogate's decree awarding $56,160 to the assignors and was therefore directly affected by the appeals that were pending.

In North American Oil Consolidated v. Burnet, 286 U.S. 417, 52 S.Ct. 613, 76 L.Ed. 1197, it was held that money in the hands of a receiver of North American Oil, appointed in a suit brought by the United States against North American Oil in which the ownership of the property from which the moneys were derived was challenged was not income to a judgment-creditor while an appeal was pending though the suit challenging ownership had been dismissed.Justice Brandeis said in the opinionat page 423 of 286 U.S., at page 615 of 52 S.Ct., 76 L.Ed. 1197:

"The net profits were not taxable to the company as income of 1916.For the company was not required in 1916 to report as income an amount which it might never...